Does it all depend on Germany? That is what desperate people think

2011-12-01

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More and more are those who ask from Germany to act big in order to save the euro from collapsing. Among these voices are top ranked politicians from various countries. The belief that Germany is the Messiah that will save the eurozone is grounded on the observation that the country is indeed the most powerful (at least economico-politically) in the European Union at present. However such a view is unrealistic for it overestimates the power of Germany, while it seriously underestimates and miscomprehends the structure of the crisis in the eurozone.

Germany is indeed the most powerful country around and few would argue on the opposite when speaking about the ability it has to shape decisions concerning EU and Eurozone affairs. In addition its strong exporting sector implies that the country can survive the crisis with much less costs than will many of its other partners. Despite that, Germany’s awesome power is insignificant if we assume that it alone can be utilized to save the euro. The public finances of the country are not as good as many tend to believe. According to Eurostat, Germany has a debt to GDP of 83.2% and a budget deficit of 4.3%, when the Stability and Growth Pact allows for a maximum of 60% debt and 3% deficit.

Based on these figures the German magazine Der Spiegel argued that Germany is a “flawed role model“. Though there is an element of truth in that argument, for me these figures, though they can be a source of uncertainty, should not be considered as worrying for Germany, since it has the power to grow sufficiently in the medium term, effectively returning back to normal.

Yet these numbers are enough to kill off any idea that Germany can provide tons of contributions to help the rest. Increasing the burdens on the German shoulders will not do any good, other than dragging the country deeper into danger zone. Squeezing the top countries to produce a weighted average at a lower level is the best way to make everyone worse off.

Germany cannot do anything, in its own capacity to address the systemic crisis of the euro, at least not at this stage (perhaps it could some years ago). All they can do, is to agree together with their French counterparts and all the other states, that the crisis in the euro area is about the architecture of the euro itself, not the “profligacy” of certain states. In addition to say the crisis is not a “Debt” crisis of states, but a systemic crisis that is deeply rooted in the structural trade imbalances within the eurozone and the malignancies of an ill regulated banking sector.

The current crisis evolves not only in the sphere of public finances, where we clearly see a series of insolvent or nearly-insolvent states, but also in the realm of private banks that now experience the high suffering resulting from their over-leverage prior to the crisis and their exposure to states that are in trouble.

In addition the euro architecture lacks a series of institutions and stabilizing mechanisms that could absorb any shocks. These cannot be filled ad hoc by Germany “taking action”, both because Germany does not have enough power to do so, while the result will not restore confidence in the market, as investors will see desperate politicians resorting to non-credible options in an attempt to save whatever they can.

It all comes down to the next Euro summit on December 9. Doctors know that after a certain point a disease has no cure. If the comedy of errors we as European citizens were forced to see in the previous summits of October and July (and those before them) continues in the following summit then I am afraid the euro is finished. Do not wait for miracles or saviors but for collective actions. If all those in power cannot put their selves together then no one can.